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The three-year shareholder returns and company earnings persist lower as Allison Transmission Holdings (NYSE:ALSN) stock falls a further 7.3% in past week

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Many investors define successful investing as beating the market average over the long term. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that's been the case for longer term Allison Transmission Holdings, Inc. (NYSE:ALSN) shareholders, since the share price is down 20% in the last three years, falling well short of the market return of around 61%. On top of that, the share price is down 7.3% in the last week. But this could be related to the soft market, which is down about 2.9% in the same period.

Since Allison Transmission Holdings has shed US$284m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

View our latest analysis for Allison Transmission Holdings

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During the three years that the share price fell, Allison Transmission Holdings' earnings per share (EPS) dropped by 1.8% each year. The share price decline of 7% is actually steeper than the EPS slippage. So it seems the market was too confident about the business, in the past. This increased caution is also evident in the rather low P/E ratio, which is sitting at 8.20.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

earnings-per-share-growth
earnings-per-share-growth

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Allison Transmission Holdings the TSR over the last 3 years was -16%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 3.5% in the last year, Allison Transmission Holdings shareholders lost 9.8% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 3% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we've identified 1 warning sign for Allison Transmission Holdings that you should be aware of.

Allison Transmission Holdings is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.